Silicon Valley deep into overseas tax havens

Sen. Carl Levin, D-Mich., on Thursday blasted the high tech industry for shipping billions of dollars in profits overseas through dubious schemes to avoid taxes. At a briefing for reporters, Levin singled out Microsoft and Hewlett Packard as case studies of how U.S. multinational corporations make extensive use of overseas tax havens in Bermuda, the Cayman Islands elsewhere to avoid paying taxes on U.S. earnings.

Levin chairs the Senate Permanent Subcommittee on Investigations, which is holding a hearing on the issue Thursday afternoon. Levin has full support on the issue from ranking Republican Tom Coburn of Oklahoma.

Levin has been on a years-long crusade to end what he called egregious tax abuses and to close tax shelters that Congress created. He said estimates show U.S. multinationals currently have $1.5 trillion parked overseas, amounting to 60 percent of their entire cash holdings.

“High tech is probably the number one user of offshore entities” to avoid U.S. taxes, Levin said. That’s because many of their assets are intangible intellectual property, which is hard to value and easy to move. He faulted both the Internal Revenue Service and Congress for the abuses. “IRS regulations are at fault and in other cases Congress is at fault for creating the loopholes,” Levin said.

Despite a steep 35 percent corporate tax rate, most multinationals pay at far lower rates by using various tax avoidance strategies. Corporate taxes have steadily declined as a share of total federal receipts, from a postwar high of 32.1 percent in 1952 to less than nine percent now. Personal income taxes account for roughly the same 42 percent of revenue, while payroll taxes on worker earnings have risen sharply from under 10 percent of revenue in 1952 to 40 percent now.

By avoiding taxes, multinationals shift the U.S. tax burden to individuals and businesses that cannot take advantage of offshore tax havens and complex overseas transactions, Levin said.

The Information Technology Industry Council, representing the tech industry, issued a response letter Tuesday calling for tax reform, saying the archaic U.S. corporate tax code no longer serves a globalized economy. The tech industry and Republicans favor a territorial tax system that does not apply U.S. taxes to foreign earnings. Corporations would pay taxes on foreign profits only where they are earned. Supporters argue that most industrial countries use that system, and that it would allow multinationals to repatriate earnings without a penalty, boosting jobs at home.

Levin outlined a “transfer pricing” scheme by Microsoft that undervalues royalties on intellectual property paid to the company’s Singapore subsidiary, which he said has no employees and is actually based in Bermuda. That and an Irish subsidiary saved the company $4.5 billion he said. the report said Microsoft avoided taxes on nearly half its revenue from U.S. sales of its products through such schemes.

Another device used by Hewlett Packard, which the company’s internal documents call an “offshore alternating loan program,” involves a continuous stream of short-term loans from company subsidiaries in the Cayman Islands and Belgium to the parent company to take advantage of a tax loophole. The result, said Levin, is that HP is able to repatriate its foreign earnings without tax.

Silicon Valley has been pushing for a tax holiday on repatriated foreign earnings; Levin’s findings suggest many tech companies are already getting a tax holiday via various loopholes like the HP loan scheme. Levin said both companies cooperated in his probe.

Microsoft tax VP Bill Sample issued a statement saying Microsoft “has a complex business and we must comply with the complicated tax code of the United States, resulting in an exceedingly complex tax structure…One of the business imperatives faced by Microsoft and many US-based businesses today is that we must operate in foreign markets in order to compete and succeed as a company. Foreign revenue growth helps support the growth of our U.S. operations, creating additional U.S. jobs and supporting an economic ripple effect that leads to greater growth in local communities.”